ANZCO achieves a huge turnaround

ANZCO Foods’ 2019 pre-tax profit was $30.6 million on record sales revenue of $1.7 billion which admittedly represents a margin on sales of less than 2% and a return on assets of 3.74%, but it is a huge improvement on the pre-tax loss of $39.1 million in 2018. It is also the third highest profit the company has achieved and its best for 16 years, signalling the benefit of the restructuring programme carried out over the last 18 months which has simplified the business and made it more efficient across the entire operation. Replying to a question about the relative importance of a favourable market and trading environment as against these internal improvements, CEO Peter Conley accepts the market conditions certainly helped, but is adamant the main benefit came from the changes to the business.

 

Comparable meat industry results on the same basis show Silver Fern Farms achieved a pre-tax profit of $89.6 million on sales of $2.6 billion for the 2019 calendar year, while Alliance’s profit was $20.6 million on the same $1.7 billion turnover as ANZCO. These three performances, highly profitable by meat industry standards, illustrate the importance of taking advantage of a year when livestock supply and favourable market pricing are not overwhelmed by cutthroat procurement competition.

 

It would be unduly optimistic to expect a repeat during the challenging 2020 season, but I imagine the companies would be reasonably happy if they only did half as well as last year. Conley says the current year has been tougher right from the start, with Lunar New Year hitting sales in January, closely followed by the Covid-19 pandemic. He Is confident the company has maintained momentum from the business improvements which will continue to be reflected in the annual performance, but inevitably market conditions will not match 2019.

 

ANZCO’s efficiency gains came from a simplified and less expensive business structure including closure of overseas offices and sale of non-core assets, plant automation, a new sales and operations planning system enabling better decision making, reduced inventory levels, shipping and storage costs. The successful implementation of these changes is clearly illustrated by an increase of $120 million in receipts from customers and a reduction of $39 million in operating expenses, including livestock procurement and employee costs, from the previous year. This enabled positive cashflow of $140.6 million compared with negative $20 million in 2018.

 

In the media release announcing the annual result, Conley states the company “made record payments to farmers for the second year in a row ensuring the benefits of higher market prices have been shared across the value chain…. ANZCO Foods has consistently paid higher prices when benchmarked with the wider industry.” The fact this was possible in 2019, while producing a massively better result in striking contrast to the previous year’s record loss, demonstrates an impressive turnaround in efficiency as well as the company’s ability to control the livestock procurement function.

 

Conley attributes much of this improvement to the adoption of the Sales and Operations Planning system which matches customer orders and product specifications to inform livestock procurement and production planning, thus reducing inventory levels and wastage. GM Sales and Marketing, Rick Walker, says this system provides much better market signals, taking advantage of ANZCO’s in market resources and close customer relationships in key markets, including Japan, China, Germany, UK and USA.

 

2019 also saw significant growth in ANZCO’s added value business which already represented 10% of turnover in the previous trading period. The Primary Growth Partnership FoodPlus initiative, completed during the year, produced two successful developments, notably the Bovogen blood product business and healthcare products. Other profitable added value units are the beef jerky plant and the beef patty production plant, although these have been severely disrupted by food service restrictions during the Covid-19 lockdown.

 

In response to questions about ANZCO’s equity ratio and the size of its balance sheet, relative to its competitors, Conley said he was keen to see further improvements in debt collection and inventory levels, although these were certainly better than 2018, and would be looking for a continued increase in the positive cashflow trend. CFO Paul Loke made the point ANZCO owned greater land and biological assets than other meat companies with its investment in Five Star Feedlots and store cattle which was a key aspect of the company’s strategy. It should also be noted the equity ratio rose from 23% to 25% in 2019 and interest bearing debt of $382 million was current and guaranteed by the parent company, Itoham Yonekyu Holdings, the ninth largest global meat company which remains very supportive of the business.

 

ANZCO takes pride in its commitment to invest in the international market and value added initiatives which it sees as a clear differentiator from its competitors. The strength and commitment of its Japanese owner means it can take a longer term view of its business activities and method of operation to the advantage of its customers, staff and suppliers. The 2019 result confirmed it is moving in the right direction.

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